Factors That Can Influence Interest Rates On Gold Loans

A gold loan is a type of secured financing option that lets you borrow against gold ornaments and coins. As per the guidelines set by the Reserve Bank of India (RBI) guidelines, a lender can give you the utmost 75% of your gold’s value. Since gold prices vary daily, most lenders will assess the value of your gold according to the market rate of gold on the day you apply for the loan. When the prices are high, you are likely to receive a higher loan amount against your gold jewelry at inviting gold loan rates. The interest rates on gold loans will have a direct impact on your repayment amount. Therefore, it is important to comprehend how the interest rates are decided and what you can do to secure a lower gold loan rate. 

Interest Rates On Gold Loans

Gold loan interest rates are in the range of 7% to 18%. The interest rate mainly depends on the loan amount and the borrower’s monthly income.  If your loan amount is higher, you will have to pay a higher interest rate. A stable and high income will help fetch a lower interest rate. The loan value is directly proportional to the weight of your gold. “If the gold ornaments are studded with precious stones, the weight of such added pieces will be excluded during the valuation process to determine the value of the gold pledged," said Raj Khosla, founder, and MD, MyMoneyMantra. The virginity of the gold doesn’t influence the rate of interest to a large extent. “There is no direct correlation between the purity of gold and the rate of interest. In some cases, say when the pledged gold is 18k in purity, the applicable rate of interest may be marginally impacted," said Khosla. Some NBFCs and banks levy a foreclosure fee of up to 2% not including the GST in case you repay the loan before a pre-scheduled repayment period, which is generally 3-6 months, and a minimum processing fee of Rs. 500 or 0.5%-2% of the loan amount.  “Banks and NBFCs charge foreclosure fees, while almost all of the new-age digital lenders only charge an interest rate," said Khosla.

The table below shows the interest rates charged by top banks and NBFCs on Gold Loan:

Factors That Impact The Interest Rates On Gold Loans

Loan Amount:

The loan amount plays a crucial role in deciding your interest rates. It depends on the overall value of gold pledged by you. If the value of the gold is higher, you will be able to borrow more. Also, the higher the loan amount, the higher would be the interest rates on gold loans. Lenders determine interest rates according to the value of pledged gold.

Monthly Income:

When compared to gold loans, a gold loan can be obtained easily and approval is simpler. But, lenders will check your monthly income before setting the rate of interest. Your monthly income determines your repayment capability.  If your monthly income is higher, your repayment capacity will be higher. A higher monthly income will help you in procuring lower interest rates. This is because lenders will be sure that you will be able to repay the loan on time. A low monthly income can impact the quantum of your loan amount too.

Evaluation Methods By Banks To Determine The Interest Rates:

Lenders mainly follow two types of evaluation methods to determine the gold loan interest rate. They are, MCLR linked lending rate (internal) and repo rate linked lending rate (external). Gold loan interest rates differ from lender to lender depending on which assessment method is followed. Bank’s lending rate associated with the repo rate is known as the repo-rate linked lending rate while the lending rate is linked to the MCLR is known as the MCLR linked lending rate.

Credit score:

Credit score is an important factor based on which banks and NBFCs determine the interest rate on your gold loan. A high credit score reflects a good repayment behavior and good creditworthiness of a borrower. In unsecured loans, a credit score defines the applicant’s eligibility. Whereas, in the case of a gold loan, credit score impacts the interest rate.

How Do Gold Loan Interest Rates Affect Your Repayment Amount?

Gold loan Interest rates will have a direct impact on your repayment amount, and this is true not just for a gold loan but for any loan. If you choose to pay lower interest rates, the repayment amount will be lower. Unlike other loans, a gold loan provides you with two other repayment alternatives other than the EMI. These methods are bullet repayment and interest payout at regular periods. But it doesn’t matter which repayment option you choose, Gold Loan interest rates will impact the repayment amount.

For instance: suppose an applicant wants to opt for a gold loan of INR 2 Lakhs for 12 months. Let us consider that he takes a gold loan at two different interest rates 10% and 20%. On taking an interest rate of 10% per annum, the EMI would be INR 4,249 and the interest outgo will be INR 54,965. On the other hand, when we take the interest rate of 20% per annum, the EMI would be INR 5,299 and the interest outgo will be INR 1,17,927. Thus, on choosing a higher gold loan interest rate, you would need to pay around I000 per month extra as compared to a lower interest rate of 10% per annum. Similarly, the interest outgo is a lot more when you choose a higher interest rate. So, it is advisable to choose lower interest rates on your gold loan. 

Conclusion

Getting a gold loan is a quick process, and in India, it is one of the quickest loans to be sanctioned as the banks have your gold as security in case of default. To get the lowest interest rates on gold loans, read and understand the above factors that influence interest rates on gold loans.

FAQS Factors That Can Influence Interest Rates On Gold Loans

1:What is the rate of interest on a gold loan?

The interest rates on a gold loan, obtained by pledging gold, are relatively lower than other types of loans. They range between 7.35% to 29% p.a. Banks and other financial lending institutions in India offer gold loans. The quantum of loan amount varies from Rs. 1500 to Rs. 1.5 crore.

2:What are the key features of gold loans given by banks?

The gold that has been pledged with the bank or the financial institution acts as the security or collateral for the loan amount given. The loan duration options can range from a minimum of 3 months to a maximum of 48 months.